A big Chinese step for Britain

UK moves to forefront of renminbi internationalisation

by David Marsh

Mon 15 Sep 2014

Britain has advanced to the forefront of efforts to promote the renminbi as an international currency with Friday’s announcement that the British government will become the first western country to issue a sovereign bond in the Chinese currency.

The move breaks new ground in dual fashion because the Treasury will abandon another previous taboo by adding the bond proceeds to the UK reserves managed by the Bank of England. This gives significant endorsement to the renminbi’s hitherto-informal status as a reserve currency.

In the week when the future of the United Kingdom is at stake in Thursday’s referendum on Scottish independence, the British government has served notice that London wishes to reinforce its position as a global trading and investment hub for the renminbi.

The Chinese currency, which is formally not fully convertible according to the International Monetary Fund’s definition, is making rapid strides towards international status and even – one day – to challenging the dollar as the world’s leading currency.

An important part of this process will be the possible inclusion of the renminbi in the IMF’s currency basket, the Special Drawing Right, which will be reviewed in 2015. There is a growing belief that the Chinese currency now conforms to a sufficient number of standards for convertibility that it will be become one of the constituent parts along with the dollar, the euro, yen and sterling.

The importance of the British step goes well beyond the financial markets. The UK is tacitly signalling support for China’s global ambitions to use its currency across a wide field. These include asset management activities by institutional investors inside and outside China as well as pricing commodities and raw materials and financing large-scale projects in areas like infrastructure.

Up to now, Britain has held reserves in dollars, euros, yen and Canadian dollars. The Bank of England agreed a Rmb200bn swap line with the People’s Bank of China in 2013. Amid considerable discussion among British officials, the Bank had not been willing previously to hold reserves in renminbi because of the currency’s de jure inconvertibility .

Similarly the UK Treasury has jibbed from offering bonds in renminbi on the grounds that it can borrow very cheaply and without currency risk on the sterling bond markets.

However, in recent years the momentum towards renminbi internationalisation has grown rapidly, from a very low base. A series of mainstream central banks, including the Austrian National Bank and the Australian Reserve Bank, joined a stream of official institutions from the rest of the world in holding renminbi.

The Swiss National Bank is considering following suit, following pioneering action by the Basel-based Bank for International Settlements, the central bankers’ central bank, to offer renminbi accounts to member institutions wishing access to the Chinese currency.

Backing the government’s move, the China Development Bank announced on Friday that it has issued a Rmb2bn bond in London, the first by a quasi-sovereign outside China. Together, these actions reinforce Britain’s position as the most important renminbi market outside Asia.

Britain is already the fastest growing market in Europe for renminbi payments, with volume doubling in the year to July. In 2013, total renminbi exchange trading in London averaged $25.3bn per day, 50% up from 2012.

All these questions are closely tied to the gradual liberalisation of China’s banking system and financial markets, which Beijing wishes to promote to support general efforts to increase economic efficiency and productivity.

And they are also linked to ‘renminbi-isation’ of worldwide capital and commodity markets, a process China seeks to drive forward in many different ways to help achieve some of its key economic, financial and foreign policy objectives.